September 2023 FIN 310 Module 02 Written Assignment Problems Problem 1 The Marks Corporation has bonds

FIN 310 – Module 02 Written Assignment – Problems

 

Problem 1

The Marks Corporation has bonds in the market with the below characteristics.  If the company has a marginal tax rate of 35% what is its cost of debt?

Bond Characteristics:

Face Value:         $1,000

Coupon Rate:    8%

Frequency of payments:              Semi-annual

Years to maturity:            12

Current price of bonds: $925

 

Problem 2

The Bella Corporation has a beta of 1.4, the market risk premium is 8.2% and the risk-free rate is 2.5%.  What is Bella Corporation’s cost of equity?

 

Problem 3

The common stock of the Sleepy Time Company is currently selling for $42 per share.  The company expects to pay dividends of $2.00 per share in one year and projects a constant growth rate of 4%.  What is the cost of equity for the Sleepy Time Company?

 

Problem 4

The Up-and-Down company has a cost of equity of 12.2%, a cost of debt of 8.6%, and a marginal tax rate of 40%.  The current market value of its debt is $10 million and the current market value of its equity is $25 million. 

a) What is Up-and-Down’s weighted average cost of capital?

b) What would be the company’s WACC if the amount of debt used was $20 million and equity was $15 million?

 

Problem 5

The Clean-You-Out Car Wash Company company has projected next year’s activity as indicated below.  Calculate the company’s Operating Cash Flow.  (The company’s marginal tax rate is 35%.)

Next Year’s Projection:

                Year 1

Sales      $2,50,000

Cost of Goods Sold          $1,00,000

Administrative Expense                $20,000

Depreciation      $40,000

 

Interest Expense             $25,000